The Determinants Of Balance Of Payment In Nigeria (1983-2007)

Project and Seminar Material for Economics

Project and Seminar Material for Economics


This study aimed at analyzing through econometric methodology the Determinant of Balance of payment in Nigeria. In the work, we capture balance of payment as the dependent variable while trade openness, external debt service and exchange rate as the explanatory variable. In the second page of the regression estimated we observed GDP as the dependent variable while balance of payment, trade openness exchange rate and external debt service being the independent variable.

An ordinary least square was used to capture the relationship between the variables been the regression plane. From the result estimated, we observed that all parameters are statistically significant from the t-test statistics. We also realize from the F-test estimation that the model is statistically insignificant because the T-cal < T-tab in all the variable. The result went further in the test of autocorrelation through the Durbin-Watson that there is absence of autocorrelation among the variable

Chapter One

1.0 Introduction

1.1 Background of the Study

Trade in the primitive era was purely by barter, means exchange of goods. This form of trade involved discrepancies in exchange value, settlement in credit or money and this discrepancies constituted the origin of concept of balance of payment (Growell 1986:1).

The term balance of payment itself entered the English economic literature during the mercantilist period. After, 1570 the balance of payments developed slowly in response to the sets of circumstances; the first was the rise of mercantilisms and the desire on the part of English businessmen and government officials to be informed of the quantitative aspect of foreign commerce.

The generic meaning of the term today is the excess of receipts over payments of any economic activity, although the concept initially applied, to and received its greatest elaboration in the theory of international trade. In its original usage, a “balance of payment” means an “excess of payment over receipts and under the gold standards, this excess means a gold outflow.

But the term soon acquired the neutral meaning of the “state of balance of international economic covers both international financial transactions and international trade in commodities and services. International trade has money merits. Some of which include creation of employment opportunities. International trade also makes room for countries to enjoy higher standard of living.

Every nation has an international balance of payment problem (Bowdan 1986:662) developed, developing countries of the world, experience balance of payments problem. But the difference between the developed and developing of countries as regards to balance of payments is that due to deterioration in their term of trade, the developing nations suffer the impacts of balance payments deficit more than the developed ones.

Due to the fact that most of the less developed economics of the world have been experiencing the problem of financing then purchases from the developed nations, many of these less developed nations removed barriers in order to increase their sales and services to the developed economics.

Because of the advantages of international trade discussed above, different nations engage in international trade. “Each country keeps her own accounts of its international dealings. Their accounts are called the balance of payment accounts”. (Chikeleze 1989:1) The balance of payment accounts are divided into two broad account: – current account and capital account. Current account is that part of balance of payment which summarizes transactions in currently produced, goods and services, investment income etc, while capital account on the other hand, is that part of balance of payments accounts which summarizes transaction in financial assets including stocks, bonds short-term credits and indirect purchases of foreign plants or businesses.

Therefore, capital account covers investments and short-term monetary flows. These accounts among other thing help each nation to know the sources of its new foreign money and about the way they foreign money balances are being used up. Each nation’s international balance of payments shows their nation’s trading and financial position with the rest of the world. “The structure of a country’s balance of payments reflects both its stage of economic development and the pattern of each activity within the country. The accounting balance of payment records both regular transactions and transactions made to settle any gap between regular purchases and sales, (Jhingan, 1986:58-60). The problem in construction of a useful operational definition of the balance, payment is thus the problem of separating regular transactions from setting” transaction, distinction best suited to the purposes of the determinants of balance of payments analysis.

The growth performance of the Nigerian economy has been determined by both domestic production and consumption activities as well as foreign transactions in goods and services. Specifically, it has been acknowledged that foreign trade is an engine of growth and development. Further, in an economy that is characterized by macroeconomic stability and favourable investment climate, attractive trade policies would encourage foreign investment, technological advancement and exports which will inturn attract massive inflow of foreign exchange.

Prior to the discovery of oil in 1960s, the Nigerian government was able to execute investment projects through domestic savings, earnings from agricultural product exports and foreign aids. However, the capacity of the economy to accumulate domestic savings, earnings to finance investment was limited. There was therefore, the inability of government to generate sufficient foreign exchange due to persistent balance of payment problem arising from the reliance on monoproduct primary export which is not competitive at the international market.

After the discovery of oil and its massive exportation in the 1970s, one would expect that more foreign exchange earning will accrue to the economy, and the economy would be able to undertake viable investment projects that will lay a basis for sustainable growth and development.

In an attempt to address the various macroeconomic problems in the economy, government adopted the demand management policy in 1982 when the problems were perceived as demand driven. Some measure where introduced like imposition of tariffs and application of contradictory fiscal and balance of payment equilibrium. All these have consequences for imports, savings and investment and growth particularly in developing countries such as Nigeria which heavily depends on imports for its capital goods and raw materials. Total Debt – GDP ratio rose from 9.6 percent in 1980 to 24.1 percent in 1985. With all these constraints on domestic financial resources and the inability of the private sector to champion the course of growth and development, the real GDP declined by 3.8 percent between 1980 and 1985.

The persistence of the macro economic problems in the economy even after the introduction of a number of stabilization measures made the government to adopt the structural adjustment programme (SAP) in 1986. This was meant to further strengthening the existing demand management policies; restructure and diversify the productive base of the economy and reduce dependence on the oil sector and on imports, and to achieve fiscal and balance of payments viability, among other underlying objectives (Philips, 1987)

Further, the SAP policy package includes trade and payment liberalization which suggests that there was no serious balance of payments constraint during the period of implementation of SAP compared to what is obtained before SAP. It should be noted that with the introduction of SAP in Nigeria, the procedure hitherto used in allocating foreign exchange and which consequently serve as a mechanism of controlling demand for foreign exchange was abolished. Thus, the foreign exchange market was deregulated. The policy aims at making foreign exchange available to whoever could avoid the prevailing exchange rate.

Between 1986 and 1993, the ratio of investment to GDP ranged between 11.0 and 18.5 percent, while the ratio of savings to GDP was between 10.0 and 28.5 percent. The savings-investment gap – GDP ratio which was negative between 1986 and 1987, became positive in the subsequent years. This suggests that the SAP period was characterized by relatively low level absorptive capacity of the economy since some proportion of savings were not translated into investment (Adewuyi, 2000). Further, the relatively low level absorptive capacity of the economy continued in the subsequent period (after SAP) as the savings-investment gap- GDP ratio was positive, while the external trade performance indicators did not show significant improvements. The ratio of fiscal deficit to GDP reached a peak of 11.0 percent in 1994, while the real GDP growth rate was less than 4.0 percent in the period 1994 to 2000.

All these is used to inform governmental authorities of the international position of the country, to aid governmental authorities in reaching decisions on monetary and fiscal policy on the one hard and trade and payments questions on the other, it is used to measure the resources flows between one country and another. Information on payments and receipts in foreign exchange constituting a foreign exchange goods and meeting payments in foreign currency when they became due and it is used to measure the influence of foreign transactions on national income.

1.2 Statement Of The Problems

In Nigeria, balance of payments problem has been a matter of concern to almost every citizen of the country for some decades now. Different households in Nigeria are encountering various economic problems brought about by the balance of payments disequilibrium. Our industrialization and technological advancement have remained very low. There has not been any substantial economic growth in the nation despites the fact that more than 60 percent of the country’s populations are engaged in Agriculture, the country still import food items to supplement those one produced in the economy.

Unemployment rate in Nigeria economy has become the basic problem in the balance of payments disequilibrium. Low rate of employment leads to low level of output and hence high cost of living. However, the central issues therefore are: what roles have our administrators to play regarding the imbalance in Nigeria’s balance of payment disequilibrium facing the economy? What impact has the nature of oil exports goods on the balance of payments problem? What influence has the activities of smugglers on the balance of payments disequilibrium? Has the low level of industrialization and technological advancement any effect on the Nigeria’s balance of payment problem?

1.3 Objective Of The Study

The broad objectives of this study are to discover the factors that influence Nigeria’s balance of payment (BOP). However, the specific objectives are:

  1. To ascertain the determinants of Nigeria’s balance of payment (BOP).
  2. To determine the impacts of balance of payment on economic growth in Nigeria.
  3. The study also aims at proffering ways of achieving a sustainable and tolerable balance of payment equilibrium.

1.4 Hypothesis Of The Study

In order to achieve the objectives of this study, the following hypothesis are tested:

  1. There are no significant determinants of balance of payment (BOP) in Nigeria.
  2. Balance of payment has no significant impact on economic growth in Nigeria.

1.5 Significance Of The Study

The study will be useful in understanding the distribution and adjustments on international transactions and thus help the policy makers and implementors.

The study will also be useful in evaluating the degree of Nigeria’s international solvency. In addition to the above mentioned points, this study will reveal the influence of national income on foreign transactions and its importance in the appraisal of Nigeria’s short-term international economic prospects.

1.6 Scope And Limitations Of The Study

This research work on the “a balance of payments determinant in Nigeria is going to cover all the Nigeria’s international economic transactions from the year 1983 to 2007. The researcher will have to find out how the balance of payment will affect the Nigeria’s economic growth within the period under study.

But despite the fact that the above mentioned problems were encountered, the researcher still forged ahead on his study.

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